Litigation

An Important Update on Employee Bonuses

By , November 16, 2020 December 21st, 2020 No Comments
Litigation

An Important Update on Employee Bonuses

Supreme Court ruling entitles employees to bonuses after termination if within reasonable notice period

Our focus in this article is the recent decision of the Supreme Court of Canada in Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 6 (“Matthews”).  Being touted a landmark ruling in employment law, Matthews should be of interest to Canadians who receive any kind of bonus or commission.  We carry on below to address the interplay between Matthews and the important Alberta Court of Appeal decision in Styles v Alberta Investment Management Corporation, 2017 ABCA 1 (“Styles”), which clarified the law with respect to how bonus incentive plans should be treated when an employee is terminated.

Matthews

The employer provided a bonus incentive plan to the employee, who worked for approximately 14 years in various management positions. According to the incentive plan, the employee would receive a bonus payment if the employer were sold while the employee was still employed. Further, the plan provided that it would be of no force and effect if the employee ceased to be an employee, regardless of whether the employee resigned or was terminated with or without cause. The employee left the company due largely to a conflicting relationship with the COO.

Approximately 13 months following the employee’s departure, the employer was sold, which would have triggered a $1.06 million payment under the bonus incentive plan had the employee still been employed. The employee brought an action against the employer alleging that he was constructively dismissed, and that the dismissal was in bad faith and a breach of the employer’s duties.

At trial, the judge found that the employee had been constructively dismissed and that the reasonable notice period was 15 months. Additionally, the trial judge found that because the employee would have still been employed at the time the employer was sold had he not been constructively dismissed, he was entitled to damages equal to what he would have received under the bonus incentive plan.

The Court of Appeal upheld the decision with respect to the employee being constructively dismissed and the reasonable notice period being 15 months but found that the employee was not entitled to damages in relation to the lost bonus payment and that any entitlement to recover the bonus ceased when the employee left the employer.

The Supreme Court set aside the judgment of the Court of Appeal and restored the trial judgment.

Justice Nicholas Kasirer provided that “had [the employee] been given proper notice, he would have been full-time or actively employed throughout the reasonable notice period” and should therefore be awarded the amount he would have received from the bonus incentive plan as part of his common law damages for breach of the implied term to provide reasonable notice.

According to Howard Levitt, who represented the employee, this case will apply to all employees including the average Canadian employee. If someone earns a Christmas bonus or sales commissions, they will also be entitled to receive them during their notice periods after termination.

Levitt further suggests that Canadian employers will likely need to revisit their language in contracts with respect to bonuses and when they are withheld due to job loss. The Supreme Court provided that strict and unambiguous language will be required by employers to deprive an employee of a bonus or benefit during the notice period. However, it remains unclear what exactly strict and unambiguous language entails.

The Supreme Court, in considering whether the provisions of the agreement were strict and unambiguous as to remove or limit the employee’s common law rights to damages, found that because the language required an employee to be “full-time” or “active”, that such language will not suffice to remove this right. “After all, had Mr. Matthews been given proper notice, he would have been ‘full-time’ or ‘actively employed’ throughout the reasonable notice period” (at para 65).

Styles

The Supreme Court in Matthews briefly discussed Styles, which the employer in that case attempted to rely on.

The facts in Styles are similar to Matthews in that it deals with an employee who was terminated and brought legal action against the employer regarding a bonus payment after termination. The contract in Styles provided that no bonus became payable until a four-year period had expired, and that participating employees had to be actively employed on the vesting date to be eligible for a bonus. The employee was employed for less than four years at the time his employment was terminated.

At trial, the employee in Styles succeeded and the judge found that the bonuses were payable. However, the Court of Appeal overturned this decision. The Court of Appeal found that the plain meaning of the contract was clear and provided that an employee had no entitlement unless they were actively employed on the vesting date (i.e., after the four year period had expired).

Interplay of Matthews and Styles

The question then is how the findings in Matthews work with the findings in Styles. Matthews provides that if an employee would receive a bonus during the applicable notice period, they are entitled to that bonus even after termination of employment. Styles provides an example where this is not met factually, as the employee would not have received the bonus within the relevant notice period. Styles may also provide an example of where the language of the relevant contract was strict and unambiguous enough to deprive an employee of a bonus during the notice period, as would be required according to Matthews.

The Court of Appeal in Styles found that the contract left no doubt as to whether the employee had to be actively employed on the vesting date, and left no doubt that any period of reasonable notice required in lieu of notice of termination did not qualify as active employment.  Although the Supreme Court has left the door open to what will suffice as strict and unambiguous language in order to deprive an employee of a bonus or benefit during a notice period, Styles may serve as a good example for employers on where to start.

Invitation for Discussion:

If you would like to discuss this blog in greater detail, or any other business litigation matter, please do not hesitate to contact Mohamed Amery.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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